If
youíre looking for certainty, youíve come to the wrong economy, the wrong stock
market and the wrong column.

The
current uncertainty about oil prices, economic growth, the pace of
interest-rate increases, corporate capital spending and company earnings isnít
likely to go away anytime soon. In my opinion, it will extend well into 2005
(and investors may not like the way this uncertainty resolves itself next
year).

So
what do you do about setting an investment strategy amidst so much uncertainty?
You embrace uncertainty and use its ebbs and flows as indicators of how to
position a portfolio. In this column, Iíll show you how that works and give you
my best shot at the 10 best stocks for the rest of 2004.

Contradictions aboundIf
youíre looking for a quick summary of the current state of uncertainty, you
donít need to go further back than last Tuesday, Aug. 17. The Labor Department
reported that the Consumer Price Index fell 0.1% in July, while the core rate,
which excludes energy and food, rose just 0.1%. The drop in the overall CPI was
the first decline since February, and the minor uptick in the core rate brought
year-over-year core inflation down to 1.8% from 1.9% in June.

In a
second report that day, the Federal Reserve announced that industrial
production climbed 0.4% in July. That brought capacity utilization at
manufacturing plants to 76.3%, up from June. And in another sign the economy is
still growing strong, single-family home starts climbed 8.5% in July, and
building permits, an indicator of future building activity, rose 5.7%.

So
the worries about the economy (it was slowing), about the stock market (share
prices were too high given weak earnings) and interest rates (they were going
higher) are over, right?

Oh,
come on. One monthís data donít make a trend, especially when it follows months
of data pointing in the other direction or when economic indicators point in
opposite directions. Which do you think defines the inflation trend: The pickup
from the 40-year inflation lows of November through January? The scary jump in
inflation that put the annualized rate above 5% in the March-through-May
period? The July drop in prices?

And
you certainly can remember the worry last week (yes, it was just that long ago)
about economic growth. The thinking then was that oil prices above $45 and the
Fedís interest-rate hikes and weak retail sales were signaling a slowdown in
economic growth.

The
data that fed those worries -- the release of advance-second quarter GDP
numbers -- certainly had enough uncertainty for everyone. Second-quarter GDP
growth came in at 3%, weaker than hoped, and economists immediately began to
trim their projections for the revised second-quarter GDP numbers to be
released next week. (The Department of Commerce issues and then reissues and
then reissues again each quarterís GDP numbers and the revisions can be plenty
big.) The consensus for revised second-quarter GDP growth is now 2.7%, down
from 3%.

Of
course, at the same time, the Commerce Department restated its first-quarter
GDP estimate to 4.5% from 3.9%.

No end to the confusion in sightAnd
the deeper you dig into the data, the more contradictions you find: Consumer
spending fell to a weak 1% growth rate, indicating a slowing economy, but
business investment climbed by 9%, indicating a strengthening economy.

This
data are doing a pretty good job of indicating just how confusing this economy
-- and by extension this stock market -- really is. While itís clear that
higher oil prices arenít a plus for the economy, no one really knows how big a
minus they might be. The last time spiking oil prices sent the U.S. economy
into a tailspin, the economy used much more energy per unit of economic
production than it does now. And global economic growth wasnít nearly as
dependent on China. Good luck on getting reliable data on the effects of higher
energy prices on that economy.

Same
thing goes for inflation: How much inflation can we expect if we balance the
effect of the Fed creating negative real interest rates against the cutthroat
cost-cutting in the current global economy? (A negative real interest rate
results when the nominal interest rate is below the rate of inflation.)

And
with regard to interest rates: Is the Fed so anxious to get back to a neutral
interest rate of around 2.5% (so that the nominal rate is at least equal to the
inflation rate) that it will keep raising rates even in the absence of evidence
of inflation or in the presence of data showing the economy is slowing?

How to embrace the uncertaintySo
weíre stuck with a roller-coaster ride as economists, investors, the Fed and
consumers over-interpret not especially meaningful data in a search for
uncertainty. One week the consensus swings toward slow growth on the best data
we have and a month later it may well swing toward OK growth before jumping all
the way back to too-slow growth. And I donít think weíre likely to have solid
evidence that adds up to real trends before sometime in 2005. It will take that
long for all thatís going on now to work its way into the economy in detectible
ways.

Until
then, investors can expect to get whiplash from this uncertainty. When
everything looks grim, as it does now, investors will seek safety. When
everything looks great, and I do expect us to hit another patch of exuberance
before the end of 2004, investors will look to snap up the volatile, high
price-to-earning ratio growth stocks in the technology sector that soar the
most when investors put on their rally caps.

So
all you have to do to make a lot of money in this market is plunge into
Treasurys when the financial markets are about to be gripped by fear, sell when
fear is peaking and then plunge into the tech sector just as investors swing
toward relative optimism.

Of
course, if you get this wrong, it can be pretty expensive. Just witness the
beating Iíve been taking in Jubakís Picks in Analog Devices (ADI, news, msgs), Marvell Technology Group (MRVL, news, msgs) and Micron Technology (MU, news, msgs) because I mistimed the technology
bottom.

My
recommended alternative is what Iíd call ďembracing the uncertainty.Ē In a
market like this one, high levels of fear produce huge price swings on just
about meaningless news. Investors, worried about being caught on the wrong side
of a trade, overinterpret news and sell big time on minor disappointments. If
you need an example, look at the flogging Smithfield Foods (SFD, news, msgs) took after it said it had missed out
on part of the unexpected rise in pork prices because it had used hedges to
lock in the price it paid for hogs. Frankly, I donít see anything that changes
the fundamentals of this company one bit. But the stock is down 16% since July
30.

This
kind of volatility means that this stock market will repeatedly put great
growth stocks on fire sale. Again look at Smithfield. Hereís a stock that over
the last eight years (the lifespan of Berkshire Hathawayís B shares (BRK.B, news, msgs)) has returned 278% versus a 169%
return on Berkshireís B shares and a 60% return on the Standard & Poorís
500 ($INX). Over the last five years, the
company has grown earnings by 10.5% annually and the Wall Street consensus
projection is for 10.2% annual earnings growth over the next five years. Yet,
after the warning and the sell-off, Smithfield is selling for a
price-to-earnings ratio of just 11.6 on trailing 12-month earnings per share.

Great growth, cheap!The
advantage of my ďembrace the uncertaintyĒ strategy is that youíll be buying
great growth on the cheap. The cheap price will temper the downside if the
company disappoints. The great growth will temper the downside if the economy
disappoints. And the cheap price and the great growth will give you solid
upside if the economy muddles through. (Which, by the way, is my prediction for
the rest of 2004 and early 2005.)

So
all you need is 10 great growth stocks selling at cheap prices, right?

Please note: All data is as of Aug.
18. EPS projections are Wall Street consensus: You and I may or may not agree
with these estimates.

Iím
going to buy two of these now for Jubakís Picks: Smithfield Foods and Middleby.
Several others, Donaldson, Engineered Support Systems, Oshkosh Trucks and
Rogers, are already in that portfolio. Despite their recent price weakness, I
donít see any reason to give up on these stocks. Several others Iíll wait on
for now until the staying power of the current rally is a little clearer or the
current rotation out of oil stocks looks closer to an end.

I
also have a list of a few stocks that fit this group on everything but price:
Theyíre up and Iíd like to see them down. This group-in-waiting includes Equifax (EFX, news, msgs), Paccar (PCAR, news, msgs), Main Street Banks (MSBK, news, msgs), Middleburg Financial (MBRG, news, msgs) and Northern Trust (NTRS, news, msgs).

Stocks
like these are the core of my position for an economy and a market like this.
You can add more risky positions around this core if market conditions look
favorable. More on those riskier edge positions in biotechnology and technology
later.

New
developments on past columns

The companies you hateJust
in case anybody was thinking that the current poor state of customer service
was an accident: ďI truly enjoyed your article on the deterioration of customer
service. Being in a service industry, I have dealt with this issue over the
last 35 years. My take on this is that the numbers have been crunched and the
calculations have been made. The point at which the churn is acceptable has
been determined. As dissatisfied customers leave one customer-service-deficient
company, they show up at the next customer-service-deficient company, which has
just lost a customer for the same customer-service-deficient reasons. And on it
goes.Ē -- Martin Geffon, COO at Motor West, Caldwell, Idaho

Changes
to Jubakís Picks

Sell ChevronTexacoIt
may seem odd that oil stocks have been in retreat (modest, Iíll grant you in
most cases) while the price of oil itself has been climbing. But there is a
logic to it. The traders who dominate the low-volume August market believe that
the price of oil is about to peak and that, therefore, the oil stocks have had
their run. In the short term, thatís quite possibly true -- and thatís why Iím
selling ChevronTexaco (CVX, news, msgs) here. In the long term, I think the
traders are dead wrong, so Iíll be looking to buy back into the sector after
this rotation is finished. I have a 4% price appreciation in the shares since I
added them to Jubakís Picks on June 15, 2004. Iíve also qualified for one
dividend payment, payable to shareholders of record as of Aug. 19. My total
return on this position is 5%.

Buy
Smithfield FoodsLetís
try this one again and hope for the same kind of results. I bought Smithfield
Foods (SFD, news, msgs) in early 2003 and sold it about a
year later at $25.58 for a 30% gain. This time Iím starting at a higher price,
but Smithfield since 2003 has solidified its hold on the pork-processing market
and the company now commands a 27% share. The stock is down 16% since July 30
with the big killer an Aug. 4 warning that earnings for the quarter that closed
on Aug. 1 would come in at 45 cents to 50 cents instead of the 58 cents Wall
Street had projected. The drop is due to losses on hog contracts that
Smithfield used to hedge against a drop in hog prices. As hog prices went up,
the company lost money on the contracts and gave up some of the gains from
higher hog prices. At recent prices, the stock trades at 11 times projected
earnings per share for the year that ends in April 2005. The company reports
earnings on Aug. 26 and cautious investors might want to wait until after that
date to buy the stock. As of Aug. 20, Iím adding the shares to Jubakís Picks
with a March 2005 target price of $28.50 a share. (Full disclosure: I will buy
shares of Smithfield Foods three days after this column is posted.)

Buy
MiddlebyLetís
see: Middleby (MIDD, news, msgs) now sells for 19.6 times trailing
12-month earnings per share and Wall Street projects that the company will grow
earnings by 20% a year over the next five years. That price looks even more
reasonable if you realize that this conservatively managed company regularly
beats Wall Street estimates (four out of the last four quarters) and grew
earnings by 47% annually over the last five years. Middelby has shown up twice
in recent columns: once in my Aug. 13 column, ď10 inflation-fighting stocks,Ē because its cooking systems
save its restaurant customers money, and in my May 19 column, ď5 stocks inflation will help.Ē As of August 20, Iím adding
the shares to Jubakís Picks with a target price of $63 by March 2005. (Full
disclosure: I will buy shares of Middleby three days after this column is
posted.)

Editor's
Note: A new Jubakís Journal is posted every Tuesday and Friday.